Landlords and secured lenders (i.e., lenders with a security
interest in tenant's personal property as collateral for a
large loan) should remember to consider underlying applicable state
law governing removal of a defaulted tenant's property when
negotiating landlord waivers or collateral access agreements.
Competing interests are at play between landlords and secured
lenders when it comes to how a defaulted tenant's property
should be handled. A landlord is most interested in its ability to
reposition its building, either through signing a lease with a new
tenant or by selling the asset - something that may be difficult
with the property of its defaulted tenant still at the premises.
For a landlord, setting a finite amount of time to allow
tenant's property to remain at the premises, or else be
considered abandoned, is critical to this process. The secured
lender, on the other hand, desires ample opportunity to devise a
plan for the disposition of tenant's property; and in some
cases, if the secured lender does not want to terminate
tenant's financing, it may not be motivated to remove the
tenant's property quickly.
Depending upon where the property is located, it may be well worth
the effort for a landlord to carefully negotiate a collateral
access agreement with its tenant's secured lender. For example,
relying on applicable law in New York may not be in the best
interest of Landlord, where rights at law only address the period
after the secured lender has decided to remove its
collateral. (See UCC § 9-604(d) -- Landlord has the right
to:
- receive reimbursement for the cost of repair of any physical injury caused by the removal
- refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse --available at http://www.law.cornell.edu/ucc/9/9-604).
It follows that simply relying upon applicable law in New York
would not provide adequate guidance as to how long a landlord would
be required to keep a tenant's property at the premises
before it feels comfortable disposing of such property without
liability to the tenant or secured lender. Landlords can make
determinations as to what may be commercially reasonable (e.g.,
providing the same notice that tenant would be entitled to at law
to the secured lender prior to disposal), but any such actions
could nevertheless be subject to legal challenge by the secured
lender.
Several other commonly negotiated points, such as (1) the right to
collect rent for the period in which secured lender's
collateral remains at the property and (2) the ability to receive
an indemnification from the secured lender in connection with any
damage to the property, are also not part of New York law. These
points and those discussed above are good reasons for landlords to
refresh themselves on local law before determining whether to stick
with applicable rights at law or to negotiate an agreement with the
secured party.
This article is presented for informational purposes only and is not intended to constitute legal advice.